Spending review ‘already reopened’, officials claim

4 October 2012 | By Ruth Keeling

Ministers appear to have reneged on a promise that local government would be no worse off under the new funding system after treasurers identified cuts of more than £1bn within the transition arrangements.

LGC reported last week on growing fears among council chiefs that their funding settlement in the current spending review period could be reopened as part of the autumn statement due in December.

It has now become clear that spending limits have already been adjusted downwards since the 2010 spending review - by as much as £2bn over two years according to one estimate.

One senior local government source said: “If you look at what has been done in the consultation on business rates, further cuts are already with us - whether this is a prelude to even more cuts [in the autumn statement] it is impossible to say.”

The LGA has identified £495m missing in the first year, made up of money held back to fund the safety net in the new system to protect councils that suffer from local economic shocks. Local government’s spending limits have also been further reduced due to a number of other factors, described by council experts as “accounting aberrations” or “a tax on local government”.

A range of other grants and funding streams have also been held back.

Shortfall: 2013-14 and beyond

Meanwhile, Newcastle City Council treasurer Paul Woods, who advises the Association of North East Councils on finance, has also identified more than £1bn missing in 2013-14 and believes another £1.7bn has been cut from 2014-15.

“We had been told that the minimal cut of 0.8% in the 2013-14 control total had been agreed specifically to provide the stability needed to implement the biggest change in local government funding arrangements this century,” Mr Woods said.

“Clearly what we had been told was too good to be true. The level of grant cuts now being proposed is shockingly higher than previously set out in the 2010 spending review,” he added.

In July 2011, communities secretary Eric Pickles repeated an earlier promise made by deputy prime minister Nick Clegg when he said: “We will ensure that no one will be worse off when the new system is introduced than they would have been under the old system.”

But David Cook, chief executive of Kettering BC and vice chair of the District Councils Chief Executives Network, said: “This cannot now be true if the total amount of money in the system is less.”

A consultation document on the new system of retained business rates issued by the Department for Communities & Local Government in July makes clear that the cash cut of 0.8% from 2012-13 to 2013-14 announced in the 2010 spending review increases to 12.3% because of the move from formula grant to business rate retention. The cut in 2014-15 also increases, from 5.4% set out in the spending review to 8.7% in the consultation document.

The money held back by central government under the various guises is set to translate into significant additional cuts for councils. Doncaster MBC has estimated that its funding for 2013-14 is set to be £8m, or about 15% lower than had been thought based on the figures in the 2010 spending review.

Jo Miller, chief executive of Doncaster, said the council’s finding had been presented to a meeting of Yorkshire & Humber local authority chief executives who had expressed similar concerns.

“There was a general view around the table that, as they had got to grips with the consultation over the summer, there was likely to be less money - never mind what happens in December,” Ms Miller said.

The funding streams with question marks next to them

Safety net - £245m in first year

The government intends to hold £245m in 2013-14 to avoid having to use its own balances to plug any shortfall in the levy payments covering safety net payments, however the LGA argues there is no evidence the levy will not suffice and argue this ‘take out’ is unnecessary.

Capitalisation - £200m over two years

In both 2013-14 and 2014-15 the government is allowing councils to use £100m of capital funding to pay for large one-off revenue costs such as redundancy payments, but it is removing the same amount from the local government settlement in what has been described as at best an “accounting aberration” and at worst a “tax” on local government by council sources.

Early Intervention Grant - £300m over two years

After the Department for Education initially promised to devolve the Early Intervention Grant to councils, £150m is now being held back by the department for other purposes.

Business rate appeals - up to £1bn over two years

Government has traditionally held back £500m a year which is then paid to councils whose business rates income does not meet expectations, perhaps because a business has successfully appealed a rating. But there are question marks over how the £500m held back in the latter half of the spending review is going to be handed back under the new system. Government has promised that it will cover 2012-13 shortfalls throughout 2013-14, but the LGA wants a commitment that appeals from 2012-13 and before will be covered whether they come in 2013-14 or in later years. One source said: “We are not saying Treasury has snaffled the money, but it has not been explained and it is a large amount of money to have no explanation for.”

Pay cap - £737m over two years

Another accounting aberration in the eyes of some, the 2011 Autumn Statement cut money from local government after the chancellor announced a pay freeze for public sector staff - despite the fact that the Treasury has no say over local government pay levels.

Tax Increment Financing - £40m over two years

Cash removed from local government funding totals to fund borrowing by successful bidders.

New Homes Bonus - £1300 over two years

While the New Homes Bonus money will be handed back to local government, it is the uncertainty about when this will be returned - and the associated uncertainty this causes in budget setting - which has concerned some treasurers. The sector is also lobbying hard for the top slice to happen year by year, not all at once, a proposal the government is considering.

Fire grants - £99m over two years

In the spending review these grants were rolled into formula grant, but they are to be removed from the business rate system’s start-up funding allocation.

Neighbourhood planning - £35m over two years

Removed from the business rate system due to uncertainty about how to distribute funding between councils.

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